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RBI allows fintech companies, financial institutions to set up regulatory sandbox
Aug-14-2019

With a view to enable authorities to take a considered view on the regulatory changes or new regulations that may be needed to support useful innovation, while containing the attendant risks, the Reserve Bank of India (RBI) has permitted fintech companies including startups, banks, financial institutions and any other company partnering with or providing support to financial services businesses to set up regulatory sandbox (RS) for live testing of innovative products in areas like retail payments, digital KYC and wealth management.

The RBI further mentioned that the focus of the RS will be to encourage innovations intended for use in the Indian market in areas where there is absence of governing regulations and there is a need to temporarily ease regulations for enabling the proposed innovation. The RS may run a few cohorts (end-to-end sandbox process), with a limited number of entities in each cohort testing their products during a stipulated period. The RS shall be based on thematic cohorts focussing on financial inclusion, payments and lending, digital KYC. The cohorts may run for varying time periods but should ordinarily be completed within six months.

Users of an RS can test the product's viability without the need for a larger and more expensive roll-out, if the product appears to have the potential to be successful, is another major benefit of such exercise. On risks and limitations of RS, the RBI said innovators may lose some flexibility and time in going through the sandbox process. However, running the RS in a time-bound manner at each stage can mitigate this risk.

RS usually refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may or may not permit certain relaxations for the limited purpose of the testing. RS allows the regulator, innovators, financial service providers and customers to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks.

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